Indian government clings to obsolete categories of financial intermediaries

As I read the Economic Survey presented by the Indian government today, I was struck by how the government is still clinging to obsolete categories of financial intermediaries. In Chapter 5 (paragraph 5.61), the government classifies financial institutions into (a) term lending institutions, (b) refinance institutions and (c) investment institutions.

This looks fine except that investment institutions refers to public sector insurance companies and not to mutual funds, venture capital funds or other true investment institutions. What is worse is that the private sector insurance companies are not included in this list but are discussed in a separate section on insurance companies.

The table on the next page (after para 5.64) is even more hilarious. The data on term lending institutions in this table includes SIDBI which is classified as a refinance institution in para 5.61. The table also includes a separate row for specialized institutions which includes a couple of venture capital companies but not all the SEBI regulated venture capital funds.

The entire classification is completely useless. During the mid 1990s, the entire category of financial institutions became increasingly anachronistic. However, more than a decade later, the government clings to this obsolete category.

Other countries have similar problems though perhaps not as ridiculous as this. In the US before the crisis, Countrywide was classified as a thrift but has now become part of a bank (Bank of America). Goldman Sachs was a Consolidated Supervised Entity (CSE) and has now become a bank holding company.

Even if we cannot bring sanity into our balkanized regulatory frameworks, can we not use sensible classifications when collecting and presenting statistical data?

Posted at 9:19 pm IST on Thu, 2 Jul 2009         permanent link

Categories: regulation

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